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But the decision also reflects the difficult balance facing the chancellor. The government needs more money to support public spending and manage its finances, particularly at a time when <a href="https://www.thetimes.com/business/economics/article/uk-borrowing-costs-highest-2008-qkh6l5xnm">borrowing costs remain high</a>. Banks are an attractive source of revenue because <a href="https://news.sky.com/story/major-lender-hsbcs-profits-up-32-as-higher-bank-tax-expected-in-budget-13604238">their profits</a> have been relatively strong in recent years.

<figure class="align-center "> <img alt="The sign for Lloyds bank on one of its buildings" src="https://images.theconversation.com/files/768855/original/file-20261028-52-lvbe7x.jpg?ixlib=rb-4.1.1&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/768855/original/file-20261028-52-lvbe7x.jpg?ixlib=rb-4.1.1&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/768855/original/file-20261028-52-lvbe7x.jpg?ixlib=rb-4.1.1&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/768855/original/file-20261028-52-lvbe7x.jpg?ixlib=rb-4.1.1&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/768855/original/file-20261028-52-lvbe7x.jpg?ixlib=rb-4.1.1&q=45&auto=format&w=754&h=565&fit=crop&dpr=1 754w, https://images.theconversation.com/files/768855/original/file-20261028-52-lvbe7x.jpg?ixlib=rb-4.1.1&q=30&auto=format&w=754&h=565&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/768855/original/file-20261028-52-lvbe7x.jpg?ixlib=rb-4.1.1&q=15&auto=format&w=754&h=565&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"> <figcaption> Financial markets expected banks to be hit harder with taxation. <a class="source" href="https://www.shutterstock.com/image-photo/skegness-lincolnshire-united-kingdon-18th-march-2764850827?trackingId=2523d5ff-ab50-435f-b264-bdbec538dbd2&listId=searchResults">Electric Egg/Shutterstock</a> </figcaption> </figure>

And since 2023, <a href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">higher interest rates</a> have helped many banks earn more. These profits come from the difference between what banks charge borrowers and what they pay savers. So, the government has a reasonable argument that banks should make a greater contribution to public finances. This is especially true when households and businesses have been struggling with high living costs.

However, the amount of additional revenue matters. Taxing banks more will generate £1.5 billion in extra income for the Treasury, but it is unlikely to make a substantial difference to the government’s wider spending commitments, such as defence. A temporary increase also means that the additional revenue cannot be relied upon over the longer term.

And the next question is who will ultimately pay for this tax increase. Banks could absorb the additional cost through lower profits and reduced returns to shareholders. Alternatively, they might try to protect their profitability by offering lower savings rates, charging higher interest rates on new mortgages and business loans, or increasing fees for customers.

However, competition in the banking market will limit how much of the tax banks can pass on to customers. Banks that increase mortgage rates or reduce savings rates risk losing customers to competitors. Given that the surcharge increase will last only 15 months, my view is that banks may prefer to absorb much of the additional cost rather than risk losing market share.

The chancellor’s decision to keep the annual cash ISA allowance at £20,000, rather than reducing it to £12,000 as previously planned could also help banks. Cash ISA deposits are an important source of funding for banks and building societies, particularly for mortgage lending.

Keeping the higher allowance could help banks retain those deposits and avoid additional funding pressures. This may also be part of the chancellor’s attempt to balance higher bank taxes with the need to keep banks lending to households and businesses.

There are also wider considerations. Higher taxes could affect the international competitiveness of the UK banking sector, as banks consider taxation when deciding where to expand their operations. Sustained higher taxation could discourage investment in the UK banking sector, potentially leading to fewer new jobs or even job losses over the longer term.

By opting for a smaller and temporary increase, the chancellor appears to have recognised these risks. His decision seems to be aimed at a balance between raising additional revenue and limiting the impact on lending and investment.

<h2>Relief on energy bills could remove push for heat pumps</h2>

Dylan Ryan, Lecturer in Mechanical & Energy Engineering, Edinburgh Napier University

The overall cost of heating with gas <a href="https://bsky.app/profile/alchap.bsky.social/post/3mywgk2e5cc24">will drop for most people</a>, except for those with larger homes, after the chancellor’s announcement.

Once the standing charge, a fixed daily fee, is removed, gas bills will reflect what people actually use. While these lower-than-expected bills will be a welcome relief for bill payers, it could weaken the economic case for households to switch to using heat pumps.

<figure class="align-center "> <img alt="A heat pump on the side of a house" src="https://images.theconversation.com/files/768879/original/file-20261028-52-vwdx3j.jpg?ixlib=rb-4.1.1&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/768879/original/file-20261028-52-vwdx3j.jpg?ixlib=rb-4.1.1&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/768879/original/file-20261028-52-vwdx3j.jpg?ixlib=rb-4.1.1&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/768879/original/file-20261028-52-vwdx3j.jpg?ixlib=rb-4.1.1&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/768879/original/file-20261028-52-vwdx3j.jpg?ixlib=rb-4.1.1&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/768879/original/file-20261028-52-vwdx3j.jpg?ixlib=rb-4.1.1&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/768879/original/file-20261028-52-vwdx3j.jpg?ixlib=rb-4.1.1&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"> <figcaption> Homeowners could be deterred from switching to heat pumps by the budget. <a class="source" href="https://www.shutterstock.com/image-photo/air-heat-pump-cooling-heating-home-2179714691?trackingId=128b533a-694c-4b1f-8064-5fbebec783e3&listId=searchResults">Nancy Pauwels/Shutterstock</a> </figcaption> </figure>

There had been rumours of cuts to the <a href="https://www.theguardian.com/environment/2026/oct/27/heat-pump-installers-fear-planned-subsidy-cuts-uk-budget">boiler upgrade scheme</a> intended to help more home owners install heat pumps. However, that didn’t happen. A government report <a href="https://assets.publishing.service.gov.uk/media/679129c5119e3470fd1e26c7/bus-evaluation-2024-interim-report.pdf">on the scheme</a> said that 65% of property owners who installed heat pumps did so because this grant was available. The report also pointed out that 52% of all recipients of the grant were large detached four-bedroom or bigger homes. So, some sort of reform could be needed.

The cut to VAT on <a href="https://www.bbc.co.uk/news/articles/c6x2zrjl7kjno">electricity</a> and the £100 paid to those in bands A-D homes will also provide some relief for energy bill-payers.

However, energy prices <a href="https://www.uswitch.com/gas-electricity/news/energy-price-cap-january-2027-latest-predictions-and-news/">are expected</a> to rise again by the next price cap adjustment in January 2027, due to the Iran war pushing up global energy prices. The government may need to provide some additional relief then. For example, further decoupling electricity prices <a href="https://observer.co.uk/news/national/article/healey-plans-deep-energy-reforms-to-cut-britains-bills">from the price of gas</a>, as gas often sets the price for electricity.

Ultimately, moving energy use away from fossil fuels is a balancing act. But the government is going to have to make further changes if it expects to meet its <a href="https://commonslibrary.parliament.uk/research-briefings/cbp-9888/">climate change targets</a> by 2050.<img src="https://counter.theconversation.com/content/295377/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important" referrerpolicy="no-referrer-when-downgrade" />

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